Kinder morgan - All posts tagged Kinder morgan

Back in August, Kinder Morgan (KMI) surprised Wall Street with a bold move. The energy-infrastructure giant paid $71 billion to buy its two MLPs and also purchased Kinder Morgan Management, and in doing so, abandoned the MLP structure it helped popularize years ago.

Today, Kinder Morgan has agreed to pay $3 billion to buy oil and gas gatherer Hiland Partners from its founder Harold Hamm. The move give sit a big entry into the Bakken basin in North Dakota, one of the most fertile producing areas in the U.S.

It wasn’t the only news released today by Kinder. The firm announced that COO Steve Kean will become CEO in June, replacing Richard Kinder, who will remain as executive chairman. Kinder released its first quarterly financial results since unifying its energy empire into a single company. And finally, the company hiked its quarterly dividend by 2.3% to 45 cents, payable Feb. 17 to shareholders of record as of Feb. 2. .

Kinder shares fell 2.38% to $41 after the closing bell. The stock has gained 9.6% over the past three months, while the S&P 500 has advanced 4.6%.

Kinder Morgan Inc‘s (KMI) $6 billion in newly minted bonds are posting gains already in their first day of trading, highlighting how strong investor demand remains for corporate debt. Yesterday the company sold a five-part bond deal that will help fund Kinder’s planned consolidation of its master limited partnerships Kinder Morgan Energy Partners (KMP) and El Paso Pipeline Partners (EPB) and related pipeline company Kinder Morgan Management (KMR) into a single, non-MLP structure.

Today all five tranches of Kinder’s bonds are among the dozen most-traded bond issues in the investment-grade market, according to online bond trading platform MarketAxess. Two of those tranches – Kinder’s 5.3% bonds due 2034 and its 5.55% bonds due 2045, are the top two most actively traded issues, with both posting gains. Yesterday Kinder sold $750 million of the 2034 bonds at 99.72 cents on the dollar at a spread of 230 basis points (2.3 percentage points) over comparable Treasury bonds to yield 5.323%; today that spread has tightened to 217 basis points, which would equate to a 5.176% yield and a 101.5-cent price, per Tradeweb. The spread on the 2045 bonds has tightened to 243 basis points from 255 at issue, trimming the yield to 5.44% from 5.573% at issue.

The bonds carry Baa3 ratings from Moody’s Investors Service and BBB- from Standard & Poor’s, placing them on the lowest rung of the investment-grade ratings scale.

The yield premium pocketed by purchasers of debt issued by highly rated companies last week hit its highest level in 2014. High-grade corporate bonds on Friday yielded 1.24 percentage points more than comparable U.S. Treasurys, according to Barclays PLC, up from a seven-year low of less than one percentage point as recently as July.

Master limited partnerships are getting absolutely crushed lately as volatility returns to financial markets. The benchmark Alerian MLP Index (AMZ) is down another 3% so far today and 13% in the past week, wiping out all but 1.1% of what had been some pretty formidable gains so far this year, as the chart on the left shows.

J.P Morgan strategists today say this is the first 10% selloff in the MLP sector in almost two years, and it comes as oil and the energy sector have gone through a particularly weak patch. While the whole sector has gotten hit, JPM says general partner c-corps and energy and production MLPs have fared the worst, and that upstream MLPs are most directly exposed to commodity prices. JPM says it favors high-quality MLPs, naming Kinder Morgan Inc. (KMI), Enterprise Products Partners, (EPD) and Plains All American Pipeline (PAA) in particular.

“Although we maintain our favorable view of MLP fundamentals, we point to blue-chip MLPs during times of uncertainty – particularly EPD, KMI and PAA,” JPM writes today. “These MLPs own high-quality, diversified assets with leading management teams and proven track records.”

JPM sticks with its bullish central thesis on MLPs, saying prolific production from unconventional energy plays will keep demand high for new energy infrastructure.

“Most core energy infrastructure MLPs possess limited direct commodity price exposure; these business models are akin to toll roads as volumes times tariffs largely drives profitability,” JPM writes. “As producers continue to focus on new emerging unconventional plays, we believe production will overwhelm existing infrastructure capacity and necessitate incremental midstream build-out. As we believe that most core acreage in leading shale plays continues to be economic at current commodity prices, we do not see a material change to the midstream outlook, which should drive strong long-term growth prospects for MLPs.”

As for potential buyers, Kinder Morgan, of course, makes the list, as do Energy Transfer Partners (ETP) and Magellan Midstream Partners (MMP), as well as NGL Energy, Semgroup and Enable Midstream Partners (ENBL).

Analysts keep examining the tax consequences of Kinder Morgan Inc.’s (KMI) decision to beam up its MLP entities into one big mothership corporate structure, and holders of one MLP in particular may come out losers. Wells Fargo Securities looks at the premiums MLP unitholders are receiving in the deal, and finds that once you subtract the taxes that will be triggered, one MLP actually ends up slightly in the red.

The three subsidiary entities - Kinder Morgan Energy Partners, L.P. (KMP), Kinder Morgan Management, LLC (KMR) and El Paso Pipeline Partners, L.P. (EPB) – have all gained in unit price since the deal announcement but await different tax treatment when the deal is finalized. Factoring in the premium being paid for for each, minus the taxes that will come due, Wells says KMP’s unitholders will effectively lose 4% on the deal, while KMR’s gain 21% and EPB’s gain 7% post-tax. More from Wells:

For KMP and EPB, the transaction will be considered as a sale of the units and trigger a taxable event. The amount of taxes is dependent on when/price the unit holder bought the stock. While some of that tax will be offset by the cash proceeds from the offering (and arguably will be paid at some point in the future anyway), unit holders will still be forced into a taxable event…. Importantly, the merger represents a tax free event for KMR unitholders….

[T]he premium received by KMP unitholders would be essentially fully offset by tax obligations upon conversion of KMP to KMI shares…. Even after KMP’s strong price performance since the merger, the gain is effectively offset by tax obligations. Similarly, for EPB, we calculate the effective premium is approximately 7% after factoring in after tax obligations (versus 18% on a pretax basis).

While Strategas earlier this week said the Kinder deal could create a template for winding down MLPs that have outgrown the structure, Wells doesn’t see much of a precedent being set:

It’s too early to say what the broader implications will be for the sector as a result of this transaction. But we don’t view this transaction as a sign that the MLP model is “broken.” Kinder Morgan was unique in that 45% of its cash flow was accruing to the general partner. With a 45% “GP tax” on KMP, it became difficult for the partnership to grow. Additionally, one of the main benefits of this transaction is the substantial cash tax savings afforded to KMI. The acquisition of an MLP by a GP structured as an MLP would not generate the same cash tax savings (given that both entities are already exempt of paying corporate income taxes). Hence, we believe only a C-Corp GP would be in a position to replicate Kinder’s simplification transaction. Notwithstanding, if Kinder Morgan is successful in executing an MLP-like model inside a c-corp, this may spur others to consider the structure. The C-Corp does offer certain advantages, most prominently access to a larger pool of capital.

Kinder Morgan Inc’s (KMI) deal to acquire its three master-limited partnership businesses businesses and wrap them up in the same non-MLP corporate structure is drawing praise on the equity and credit sides alike, causing at least one bank to ponder whether it creates a template for aging MLPs that have outgrown the utility of the structure.

On the equity side, investors have already shown their approval by driving up the share prices of KMI and its three MLP businesses – Kinder Morgan Energy Partners, L.P. (KMP), Kinder Morgan Management, LLC (KMR) and El Paso Pipeline Partners, L.P. (EPB) – by anywhere from 9% to 22%. Credit Suisse equity strategists today call this a “very positive” deal that will “vastly simplify investing in Kinder Morgan.” Bank of America Merrill Lynch calls the deal “largely positive” and upgrades KMI stock to a “Buy” rating, and wonders aloud whether the deal is a harbinger of what’s to come for other MLPs that grow too big for their own good:

We think this transaction will likely spawn investor questions regarding the end game for mature MLPs with a general partner (GP) in the highest tier of the incentive distribution rights (IDRs). While we do not see other GP-buying-LP transactions occurring yet, we also think it provides a template for a somewhat graceful exit from a structure that can prove long-term unwieldy as an MLP grows.… [W]e expect significant interest in potential MLP consolidation candidates.

On the credit side, Standard & Poor’s just put KMI’s credit rating on watch for a possible upgrade. In its deal announcement, Kinder said it had run the idea of the deal past rating agencies and that it expected the combined entity to end up with investment-grade ratings. S&P today affirmed Kinder’s rating at BB, the upper tier of speculative grade, and put it on “watch positive,” which in S&P parlance means it’s in line for a possible upgrade. The rating agency says it expects the eventual rating to climb to BBB-, the bottom rung of investment grade, once the transaction closes.

The bond market is already treating Kinder like a rising star, so to speak. That’s the bond-market term for a junk-rated company that manages to claw its way up to an investment-grade rating, which is to the benefit of bondholders, and that explains why Kinder’s 7.75% bonds due 2032 are trading a whopping 14.35 points higher today at 125.25 cents on the dollar, according to online bond trading platform MarketAxess. At that price the bonds yield 5.48%.

My colleague Andrew Bary’s cover story in this week’s Barron’s magazine examines the Kinder Morgan complex of businesses, which includes Kinder Morgan Energy Partners (ticker: KMP), Kinder Morgan Management (KMR), Kinder Morgan Inc. (KMI), and El Paso Pipeline Partners (EPB), focusing particularly on KMP, the master limited partnership side of the business, and KMI, the general partner. Bary says KMP now looks expensive, even unattractive compared with other big MLPs. He quotes Kevin Kaiser, an energy analyst at independent Connecticut research firm Hedgeye, calling Kinder Morgan’s valuation “crazy,” saying the company’s distributable cash flow is overstated because its maintenance capital is understated, adding that he sees within the Kinder complex “an enormous transfer of wealth from KMP [the MLP] to KMI [the GP]“. Here’s Bary with an explanation of some of the valuation metrics:

Kinder Morgan MLP incurs significant capital expenditures to maintain and expand its energy infrastructure, spending a total of $3.3 billion last year and a projected $3.5 billion in 2014. Those expenditures fall into two buckets: sustaining, or maintenance, capital, and expansion, or growth, capital. The key difference between the two is that sustaining capital reduces distributable cash flow, while expansion capital does not. Kinder Morgan’s expansion capital is almost entirely financed with new debt and equity from the MLP, making it vulnerable to higher interest rates and dislocations in the capital markets….

The company says there’s been no wealth transfer because the categorization of sustaining and expansion capex adheres to the partnership agreement.

Bary says “the smart money has gravitated toward the GP,” with CEO Rich Kinder owning an $8.1 billion stake, versus just a $26 million stake in the MLP.

For an in-depth discussion of how to value MLP investments, including the relationship between MLPs and GPs and how capex affects distributable cash flow, check out my MLP roundtable story in last week’s issue of Barron’s.